Keynes' Brilliant Moment

Fred:  Keynes proposed that everyone would have a job if the government would print more money and distribute it widely.
Mike:  Distribute it to me, and I wouldn't have to work.

A lost recording, England 1932:

Keynes:  There must be a way to end this depression. Along the way, we can show that government can be good, and business is bad.

Assistant:  How to do it?

Keynes:  I have it! There is not enough demand for goods and services. Something changed, and people stopped wanting enough stuff. They became suddenly and disastrously frugal, and no longer want to buy things.

Assistant:  With a raise, I would buy more things.

Keynes:  Forget the raise. If only we could find Martians who would buy more of our stuff, then people would work for the Martians. The increased demand would get money flowing, like a river, and we would all be rich.

Assistant:  Sir, we had a long talk about the Martians. We have gone over that.

Keynes:  OK, yes, no Martians. Where else can we get demand?

Assistant:  How about the French and Germans?

Keynes:  They are not rich enough. They are still progessing toward wealth through adaptation to Socialism, and they haven't yet adapted. They have this stupid notion that they should sell more of their stuff to us, not buy more stuff from us.

Assistant:  If you and I both had more money, we could buy things and help to raise demand.

Keynes:  More money? Eureka! The government can print up the stuff and spread it around. And, I can get more money by advising the government. The workers will chase those pieces of paper like catnip. They will become used to working again, instead of being lazy and stupid.

Assistant:  More people may find work. But Sir, the value of money will fall and prices will go up. Everyone now working and saving will be silently taxed to employ those extra people. And, what will happen when the stimulus stops?

Keynes:  First, we and our friends in government will all have more money. That has to be a very good thing. Second, in the long run we are all dead. Forget about tomorrow, it is in the future.

Assistant:  So, I get my raise?

- -
Use Inflation to Fool People
Keynesian economists expect most people to be slow-witted and unable to make rational economic decisions. The government tries to fool people into working harder by inflating the currency to just the right amount. But, it doesn't work for long.

"Keynesian Economics" in The Political Dictionary
Understand politics by knowing the meanings of things.

Econ 201: The Myth of the Economic Multiplier
You don't create $40 in wealth by paying $10 to mow your lawn.

The Deadweight Loss of Taxes
Collecting $1 in extra tax kills $2 in production.

A Short Argument Against Stimulus
It isn't so stimulating when you know that it must be paid back.

Let's Counterfeit Our Way to Wealth
If Obama and Keynes are correct, that there is a 1.5 wealth multiplier on spending, then $100 in spending produces $150 in wealth, and we should all benefit from counterfeiting. It is not my fault that the belief in a multiplier is so outrageous that it leads to this outrageous result.

The Stimulus Resort Town

Politicians like the idea of stimulus spending because it justifies taxing, borrowing, and spending. Spending is always pleasant and gains friends and support. They claim that stimulus spending will make us prosperous because it multiplies wealth in the economy.

The Obama team claimsEasyOpinions: Let's counterfeit our way to wealth that each $100 of government spending creates $150 in new wealth, so everyone wins, and it doesn't matter on what it is spent.

Craig C's comment at Mises.org gives an analogy commonly used to illustrate how stimulus loans or spending multiplies production and trade. I repeat it here, revised.

People start in gridlock. A stimulus loan breaks the gridlock. They resume working and trading, and end up happy. The money involved is a true stimulus; it unlocks the local economy and is paid back. This is a vivid and amazing example. But, it is contrived and unreal, like finding five dominoes ready to fall by pushing just the first one.

Stimulus Story

It is rainy and quiet in a small resort town. It is a tough time. Everyone is in debt and lives on credit.

A government official enters a restaurant, lays a $100 bill on the counter, and tells the owner Frank that it is a stimulus loan.

• Frank takes the $100 and runs to pay his debt to the butcher.
• The butcher pays his debt to the farmer.
• The farmer pays his debt to the supply store.
• The supply store pays its debt for newspaper advertising.
• The newspaper pays its debt to Frank at the restaurant.
• Frank lays the $100 bill back on the counter.

The official smiles at all of the good he has done. He remarks that this is the Keynesian Multiplier in action; $100 in new money promoted $500 in production and trade. He takes back his $100 and leaves town. The town is now without debt and looks optimistically to the future.

That is supposedly how the Stimulus Plan works.

Read more for the reality ...

Reality

I like that story because it sets up a beautiful situation, just so. The government provides a "stimulus", the money flows around, everyone is happy, and it didn't cost anything, like a fairytale.

I like another version even more. Frank writes a bad check for $100. The check goes around the town and comes back to Frank, who tears it up. The check is illegal, but the government stimulus isn't needed. This version supports counterfeiting.

The less amazing, more realistic version of the story goes like this.

Restaurant owner Frank, impractical and desperate, owes everyone in town. He spent his last borrowed dollar rather than sell the restaurant to someone who could run it at a profit. He waits behind the counter for his creditors to call. He doesn't have $100 in the bank to pay the butcher.

Meanwhile, the butcher takes $100 out of his bank account to pay the farmer, and that $100 goes around the town. The newspaper pays Frank $100, and he pays the butcher.

We don't know why the butcher would extend credit to a restaurant with no money in the bank. Soon, Frank declares bankruptcy and sells the restaurant.

The Stimulus Story proposes a group of businesses all doing useful work for each other. They have already produced things and have traded among themselves. They only need to pay their bills. Any one of them can take $100 from his bank account to settle the chain of obligations. Usually, they all take $100 from their accounts to pay their bills.

In reality, a whole town is not caught in the trap of having no cash to exchange while selling to others on credit. A stimulus loan has little or no effect on current business transactions.

The flurry of payments settles $500 in past transactions, which makes it seem like the $100 has multiplied 5 times. It is a distraction from what the stimulus loan actually accomplishes.

The Real Stimulus Effect

The true value of a $100 loan is just the value given to restaurant owner Frank. Frank can buy an extra $100 of goods, pay debts, or save. (Paying debts or saving isn't so bad.)Click/Return to see below why this is not a burden on the economy.

If Frank is going bankrupt, he probably spends his loan, hoping for a miracle. If Frank is not desperate, he pays down his debts or saves the money. He is not going to risk the loan by expanding his business in a poor economy.

Say the money is a grant instead of a loan. Frank is even happier, but this doesn't lead to risky investment. It is his money now, and he doesn't want to lose it.

Government Spending

In a bad economy, people have debt and jobs are uncertain. It is natural for them to pay off their debts. What can a government do to "pump" money into the economy to buy goods for consumption? The government spends the money. (Note) If you must ruin an economy by artificially increasing spending on consumer goods, then government spending is about the only way to do it.
 Government claims this helps the economy. Instead, it pays politicians and supporters, and builds voting support. The claim of helping the economy is a cover story.
 The government must collect more tax from productive people to support these schemes..

It is true that a specific $100 in production may occur from an extra $100 in government spending. But, for every Frank who gets extra business, there is a Jim who has the money taxed from him. Jim buys $100 less of something, removing $100 of production which would have happened anyway.

The total effect of the stimulus spending is that Frank gets $100 more business, and Jim buys or saves $100 less. That fails to "jumpstart" an economy, no matter how big the amount which is taxed and spent by the government.

Government Borrowing

The government can borrow the $100 that it spends at Frank's restaurant. Frank is happy, and Jim doesn't seem to be affected, at first glance.

Frank is happy with the extra business. But, this is not a sustained flow of money, and Frank does not install more tables. He hires only temporarily or part-time, if he hires at all.

Business owners read the newsEconomists Surprised That People Read the Paper
-----
06/08/09 - Easy Opinions
  Leftist economists don't consider that people react to policy. People see the coming wave of taxes, regulation, and inflation, and they alter their behavior immediately. They stop investing and prepare for hard times.. They know the government is temporarily increasing purchases. They can't know what part of their sales is from stimulus and what part is from an improving economy, so they delay expanding and hiring. Worse, they don't know how increased taxes will affect sales in the future.

Business owners are being rational. It is better to miss some business by expanding later, than to expand early and risk bigger losses if sales drop. Ironically, the stimulus interferes with the sales signals and market stability that would encourage businesses to expand. This slows expansion and reduces employment.

The current stimulus is being distributed over a period of years, so it will interfere with business decisions for years.

•  Jim prepares to pay

Jim knows that he will soon have to pay higher taxes to pay off what the government is borrowing. So, he lowers his spending and saves for that future expense. He overestimates; it is better to spend too little than too much. The government creates uncertainty by proposing many, confusing, new and increased taxes.

The result is that Frank gets an extra $100 in business. Jiim reduces his consumption spending by $100 or more, and instead buys safe investments. This does not improve the overall economy, but it does produce a different demand for goods, helping some businesses and hurting others. Unemployment rises as people must change jobs between businesses, and people must take jobs at lower salaries while they learn new skills.

Politicians arrange photo-opportunities with businesses that have government contracts. They don't advertise the many businesses that shrink or close because their sales have declined in a disrupted economy.

Politicians point to improved businesses and call for increased stimulus spending to stop layoffs at other businesses. This is clueless.

Creating Money

The government can "create the moneyClick/Return for detail below. All money is created by the Federal Reserve Bank. The government usually gets to spend it first." and seem to take value magically out of the air. The government first raises taxes and borrows, but that doesn't satisfy its desire to spend.

Creating more money causes all money to lose some value through "inflation". Prices go up as store owners notice they are selling all of their goods on hand. They raise prices following price increases by their suppliers. They wonder where the extra demand (money) is coming from, and why supplies do not increase to meet that demand. The answer is that government is increasing demand without producing much to increase available supplies.

This steals value silently from everyone with a job or a bank account, and it falls more heavily on the lower and middle classes. Their wages fall behind inflation and their savings are more in cash, bank certificates of deposit, and bonds, which lose value as prices go up.

So, Frank happily spends or saves an extra $100, and $100 is silently skimmed from the value of all money. The transfer of value is like a tax, but the result is more negative due to business uncertainties and dislocations.

Some business owners see increasing sales, and wonder if they are from a better economy (more production all around) or from inflation. Other businesses suffer as their customers buy different goods. Some people save more as they see prices going up, or possibly spend more to beat future price increases. Business becomes less predictable.

Notice that the government properly considers counterfeiting to be a serious crime. But, politicians call it "fiscal policy" when they create money out of thin air and spend it to promote projects for their supporters.

Disinvestment

People are productive because they have knowledge and tools, personally or through their employer. A person needs a hammer to build a house, and a power-nailer builds faster and at lower cost. A small shop can make a few hammers. It takes a large factory to make many hammers and power-nailers, and much effort to work out ways to make them better, safer, more durable, and cost less over time.

There is a big risk in building a factory, and many lose money. Sometimes, the owners become rich through knowledge, planning, management, and some luck. It is fascinating that these people become despised as "the rich", when their wealth comes mostly from practical achievements that help others to a productive and comfortable life.

Progressive tax rates04/2009 - Easy Opinions
  A comparison of the 2006 tax rates and total tax contributions by adjusted gross income. take more money from high earners as a percentage of their income. The idea of a stimulus extends the idea that the rich should pay more of their lazy money to others who will spend it and create a growing economy.

Here is the problem. The rich are the major investors in companies, and so in factories. Money taken from them does not get to those investments. Instead, it goes to Frank, who buys more consumer goods or invests more conservatively in bank accounts. Investment that would create jobs is drained away to create some overtime for current workers.

"Soak the rich" is bad policy.

• High productivity produces most high incomes. There is no moral basis for taking a higher percentage of that money from the people who have earned it; they aren't bank robbers. The government is acting like a bank robber, taking money from those who have it, as pure politics and power.
• Taking that money removes it from the people who have the most judgment and ability to bear the risk of building new companies. The government is much worse at this.
• "Soak the rich" puts the non-rich out of work or reduces their incomes. That isn't a good tradeoff.

Large Incomes, Skill, and Luck

You may think the rich are partly lucky, so they shouldn't keep all of their money. Do you also think that lottery winners should split their winnings? They are 100% lucky, and do much less to produce a productive society.

Successful actors and athletes are admired because their abilities are on direct display. We like watching them, and we understand the basis for their incomes, even if there is some luck involved. We don't yell at them to take less money, because we understand that they are worth it. They would not have put in long years of training and sacrifice if they didn't have a chance to make it big.

The skills of successful businessmen/women are not directly on display. But, we can see that they produce products and they create jobs to make those products. Products and jobs provide for better lives. Yet, people are easily angered by the large incomes of some businessmen. We should understand that, like athletes, they are worth it. They would not have put in long years of training and personal risk if they didn't have a chance to make it big.

Details

Spending, Paying Debts, and Saving

We hear that 70% of the economy is consumer spending. The quick reaction is to 03/2009 - EasyOpinions: Cargo Cult Economics
 Government sees that people spend more during prosperous times, and wrongly concludes that higher spending causes prosperity
 I get it. People use umbrellas when it rains, so using umbrellas causes it to rain.do something, anything, to increase this spending. Government tells us that spending is good and saving is bad.

This has now moved to the strange idea that if the public won't spend enough, then the government will do it for them. This is the idea that the government can spend its way to our prosperity, taxing along the way.

Actually, paying debts, saving, and investing are all types of spending.

• Paying debts is the completion of past spending. If spending is good for the economy, the debtor has already done his part. Paying off the debt prepares for future spending. Not paying the debt would cause economic disruption.
• Saving lends money to a bank, which supports spending by other people. Credit card debt supports consumer spending. Housing and car loans support buying those durable goods. Loans to businesses help them produce more.
• Investing is a high-powered use of resources at a higher risk. Investing directly supports new businesses, major business expansion, and the creation of jobs.

The amount spent on each of these is a personal decision. The "economy" is there to serve the individual, not the reverse. People should acquire the goods, savings, and investments that they understand and can support with their earnings.

Would it help the "economy" if the government forced you to take 10% of your savings and spend it on something? Only in the sense that "consumer spending" would go up. It would hurt you personally because it would disrupt your plans.

If you are saving money rather than buying a new car or a vacation trip, it is because you want the option of buying something more important in the future, maybe food and rent.

Go back

Creating Money

Is Money Worth Anything?

All U.S. dollars are printed or electronically distributed by the Fed, the United States Federal Reserve Banks. The Fed runs the U.S. Mint to print currency and stamp coins. It creates electronic money by sending authorizations to its member banks. Paper dollars are Federal Reserve Notes, literally small obligations of the Fed.

Each dollar is an obligation of the Fed to pay you a dollar. You are allowed to laugh at this. What does it mean to present a dollar to the government and be paid back that same dollar bill? Before 1935, the government would give you a definite amount of gold or silver, if you presented the dollar bill for payment. Since then, there is no obligation of the Government to give you anything for your dollar.

All dollars are created out of thin air, so why do they have any value?

• There is an established market and price for trillions of dollars of real goods and services.
• Dollars are defined by law as "legal tender". Any transaction can be valued in dollars for disposition by a court or for the collection of taxes.
• The Federal Government levies taxes and you can use dollars to pay taxes.
• The Federal Reserve has assets that are supposedly worth the dollars created.

There are trillions of dollars in private loans secured by tangible things, such as commodities, automobiles, and buildings. Some loans are secured only by future income, like credit card balances. All loans are obligations between people, and the supply of money represents these obligations, giving value to the money.

Inflation

The Federal Reserve Banks can abuse their power to create money, so that all money loses some value.

Inflation results when the Fed loans money to the US Treasury, creating money, which the government spends, without a resulting increase in tax revenues that can pay back these loans. Inflation is the loss of value in the money supply from bad loans made to the US Treasury.

The longer explanation of inflation requires knowing how a good bank can create trustworthy, electronic or paper money. This will wait for another post.

Go back

Links

-----
The Federal Reserve
Investopedia
An overview of the structure and duties of the Federal Reserve.

-----
Money Created Out of Thin Air
07/30/04 - Richard Benson, President Specialty Finance Group

[edited] Money is created in two ways. First, money creation comes from borrowing it and spending it. Second, it is simply printed up "out of thin air" by a central bank and used to buy something.

-----
The Record of the Federal Reserve
07/24/09 - LewRockwell.com by Erik Voorhees

[edited] The Federal Reserve System is fraudulent. Its effective purpose is to create a mechanism of deficit spending by politicians, through invisible taxation by monetary inflation. The Government buys services for its voters with created money at current prices. The voter's money buys less the following year, as the new money raises prices, and they are none the wiser.

From 1776 to 1912 (136 years):

• A dollar would buy 11% more consumer goods in 1912 than in 1776.
• $1,110 in 1776 bought the same bundle of consumer goods as did $1,000 in 1912, for comparable goods.
• The dollar was a stable and slightly increasing store of value. You gained a little if you put it under your mattress.

The United States Federal Reserve (the Fed) was created in 1913 to "conduct the nation's monetary policy in pursuit of full employment and stable prices". "Stable prices" means that a dollar should buy about the same amount of consumer goods over time.

From 1913 to 2008 (95 years):

• A dollar would buy 95% less consumer goods in 2008 than in 1913.
• $50 in 1913 bought the same bundle of consumer goods as $1,000 in 2008, for comparable goods.
• The dollar slowly sank in value. You retained only 5% of its value if you put dollars under your mattress during that time.

Americans should feel outrage about this. Yet, they are not very upset, and the vast majority has no clue. Americans are educated in Government schools, which barely teach basic accounting, let alone monetary theory. In public school, I was forced to memorize the names of every African country. There was no discussion of the nature of money or the economic principles which caused political turmoil in Africa.

-----
Keynes, Upside Down
02/02/09 - Richard Benson, President Specialty Finance Group

[edited] Too much borrowed money has left the private sector riddled with bankruptcy. Far too many loans were made on the probability of being refinanced, not on the ability to be repaid!

Bad loans could be refinanced into bigger bad loans while liquidity (willingness to lend) was flowing. Now, the refinancing has stopped. Millions of Americans and business owners are suffering and can't face the music.

Too many loans (liquidity) were made to people who could not pay them back. This caused mass insolvency. How can more loans and public borrowing be sold as the cure? It is government double talk. They are calling this insolvency a "liquidity trap" so they can print fresh money without guilt.

-----
Recipe for Economic Stagnation
07/21/09 - American Thinker by Andrew Foy and Brenton Stransky

[edited] John Maynard Keynes recommended government intervention. Milton Friedman recommended free markets and a predictable, boring economic policy.

The government followed Keynesian principles in response to the Great Depression. It created 15 agencies, increased spending by 220%, increased taxes by 68%, and increased the deficit to $24 billion.

Friedman proposed that government intervention prolonged the depression. His view has been validated over time. "Far from the depression being a failure of the free-enterprise system, it was a tragic failure of the government."

-----
Cargo Cult Economics
03/2009 - EasyOpinions

Government economists see that people spend more during prosperous times, and wrongly conclude that higher spending causes prosperity.

I get it. People use umbrellas when it rains, so using umbrellas causes it to rain.

-----
Let's Counterfeit Our Way to Wealth
02/2009 - EasyOpinions

The Obama team follows Keynesian economic principles. They claim that every dollar in government "stimulus" spending creates $1.50 in wealth.

The 1.5 wealth multiplier is part of the Keynesian myth that distributing money promotes a recovery. But, every dollar spent by government has to be collected as tax, sooner or later. Any money borrowed now takes resources now from some other, valuable use.

If the multiplier were true, then the government could license counterfeiting and we would all become rich. Actually, the government attitude toward printing money is very close to counterfeiting.

-----
Banks Create Money
08/09/09 - Ingri Mayne - CyberEconomics

[edited] For several centuries now most money has been in the form of bank debt. A checking account is merely money that the bank owes you, and paper money represents something that the Federal Reserve System owes you. (Try to collect this debt from the Federal Reserve, though, and see what you get.)

The creation and destruction of money is the creation and destruction of bank debt.

-----
Federal Reserve Ready To Buy Assets
07/29/09 - Telegraph Co UK - by James Quinn

[edited] The Fed may buy back U.S. Treasuries, support lending to small businesses, and support credit card and car loans. The Fed continues to buy large amounts of government-backed mortgage securities.

The Fed creates more money by buying assets. Usually, it limits itself to buying government debt, Treasury bonds. It is now directly buying other debt, such as bonds representing bundles of home loans (Mortgage Backed Securities).

If these debts are paid off, then the money created will not cause inflation. If not paid off, the losses show up as inflation, the decreased value of all money.

-----
Google Search: Money Creation Inflation

Minimum Wage Prosperity

Suddenly, McJobs are Good (Link is stale)
07/24/09 - Blogs.DailyMail by DonSurber

[edited] Labor union officials and their handmaidens in Congress, including former congresswoman Solis, derided any increase in employment under a Republican president, calling them "McJobs". They derided them, even if they were above minimum wage, because new jobs do not pay as much as old jobs.

Now that Obanomics has turned a mild recession of 7.6% unemployment into 9.5% unemployment, in just 4 months, we have Solis praising a 70 cents an hour increase in the minimum wage as an economic stimulus.

Solis says that raising the minimum wage to $7.25/hour is going to help the economy and increase employment. I hope she doesn't mean it will help the economy while decreasing employment. Or, hurt the economy while increasing employment.

Where are the studies and information about the ideal minimum wage? Maybe the sky is the limit. Why not set the minimum wage at $50/hour? That would send funds to poor people while lifting the economy, right? (sarcasm)

The minimum wage is just another way of saying: "Fire that person unless you can pay them $7.25 per hour. We would rather that they be out of work, than work for less than we think is polite."

The government cannot help people by restricting their choices.

- -
A Minimum Wage Equals Minimum Jobs
07/30/09 - Reason.com by John Stossel

[edited] Politicians declare that workers should get a raise, and people assume they will actually get it. But, government can increase wages by decree only if employers set wages arbitrarily. You have to believe that employers are arbitrarily stingy.

Say an employee produces $4 of value each hour after all business expenses, and the employer offers just $2. Another employer will hire him away for $3 or more. Competition drives wages up to the the worker's level of productivity.

Several years ago, Santa Monica, CA made the town a workers' paradise by requiring everyone to be paid at least $12.25 an hour. Restaurant owner Jeff King complained to me, that the law would "dry up the entry-level jobs for just the people they're trying to help."

He was right. It's why gas stations no longer hire teenagers to wash your windshield. Wage minimums tell employers: "Don't give a beginner a chance." The people of Santa Monica later woke up and overturned the "living wage."

If minimum-wage advocates really believe wages are set arbitrarily, why do they favor only a $7.50 or $14 minimum? Why not $100? At those levels, even a diehard interventionist knows that workers would be hurt. But, the principle is the same at lower levels. Wages follow productivity, not whim. If the minimum wage is set above productivity, those workers will be harmed.

- -
The Minimum Wage Explains Some Job Losses
03/13/11 - EconLog by David Henderson

Tyler Cohen [edited]:  Many workers are paid very close to what they produce. Their productivity may even be lower than the cost of training, employing, and insuring them. Firing these employees is tough for the workers, and maybe bad for society at large, but it doesn't much reduce profits. It's a cold, hard reality.

Why can't unemployed workers find new jobs for less pay, especially now that business is recovering?

David Henderson [edited]:  The explanation is the minimum wage. On July 24, 2009, it increased by $.70 to $7.25 an hour. The real increase was about 12% when adjusted for inflation.

A 10% increase in the minimum wage causes a 1-3% drop in the number of jobs held by people age 16 to 24 ("youths"). A 12% increase (as above) would cause job losses of 190,000 to 570,000 among 16 million youths. That is from the increase. The previous minimum certainly kept many others from being employed.

If your productivity is low, or the costs of training you are high, then you won't be able to find a job at the minimum wage. This is true even if you know inside yourself that you could learn a job and become productive in a short time.

The government allows you to get training by paying a school for six months, while you may earn nothing. But, it will not allow a business to "exploit" you by paying you a small wage while you get practical training on the job for six months.

- -
Low Skilled Workers Are Not Helped
07/26/09 - Cafe Hayek by economist Don Boudreaux

[edited] Uncle Sam has hiked the minimum wage, raising the hourly cost of employing low-skilled workers by 10.7%. This is always unwise, and more so when unemployment is rising.

Say that Uncle Sam passed a minimum-salary statute for economists, requiring that every employed economist be paid at least $300,000 annually. I would, of course, love to earn this much by teaching economics. My more accomplished colleagues would benefit, such as Tyler Cowen and Walter Williams. But, I would lose my job.

- -
Using the Minimum Wage to Hamper Your Rivals
07/24/09 - Econlog.Econlib by David Henderson

[edited] Forty years ago, politicians who pushed for the increased minimum wage did not hide their motives or their knowledge of who the victims would be.

In a 1957 Senate hearing, Senator (and future President) John F. Kennedy of Massachusetts said:

Having on the market a rather large source of cheap labor depresses wages outside of that group, the wages of the white worker who has to compete.

When an employer can substitute a colored worker at a lower wage, it affects the whole wage structure of an area, doesn't it? There are, as you pointed out, hundreds of thousands of colored workers looking for decent work.

- -
Increases in the Minimum Wage Kill Job Creation
06/15/10 - HotAir by Ed Morrissey

[edited]  The Center for Freedom and Prosperity offers this 4:25 video about the destructive results of the minimum wage.

Democrats increased the minimum wage in steps from $5.15 to $7.25 per hour. They claimed to be helping the young and poor.

The minimum wage did no direct harm when it was less than the usual wage for entry-level jobs. When the minimum wage rose above that wage, employers stopped offering those entry level jobs.

- -
Exploiting the Minimum Wage
07/24/09 - Open Market by Ryan Young

[edited] Young people with little or no work experience may not be able to offer $7.25 per hour worth of productivity. No wonder so many of them are having trouble finding summer jobs. The law says that they have to be paid more than they are worth [if they are hired]. Wage floors reduce the number of jobs.

- -
Raising Rival's Costs
7/24/09 - Marginal Revolution by Alex Tabarrok

[edited] Some employers benefit from an increase in the minimum wage because it raises the cost of labor for their rivals. This is why unions have typically been in favor of the minimum wage even when their own workers make much more than the minimum.

Gaining Power Through Public Policy

Social Science and Public Policy
07/03/09 - EconLog by economist Arnold Kling

[edited] Political Economy is the science of obtaining and retaining power. The pollster, the fundraiser, and the media expert supply expertise to the operation. The public policy expert is for decoration. If you want to be an economic policy adviser, my advice is to learn how to put a good spin on the methods used by leading politicians to obtain power.

Is Health care reform about health, the stimulus about recovery, cap and trade about global warming, or TARP about the financial system? No, they are about seizing and retaining power.

The social scientist's role is to say, "X is a problem. Government must solve X. Here are some solutions." The solutions that rationalize seizing and retaining power will bubble to the top.

Suppose you believe that regulators cannot possibly have the wisdom to direct human activity, and that politicians spending other people's money tend to choose unwisely. Keep those beliefs to yourself, if you want to get anywhere as a public policy adviser.

Economists Surprised That People Read the Paper

The Grand Unification Theory of Sucking
06/07/09 - VodkaPundit by Stephen Green

[edited] Big Government Spending Programs are Having an Opposite Effect

The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.

But this and other big government spending programs are having the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.

Well, duh! Stimulus spending can’t work, because these things happen, and I’d say we will indeed get all three:

1. Extra spending means extra taxes, which means the whole thing is a wash. It is a big, fat lie that Government spending has a “multiplier” effect different from consumer or business spending.

2. Extra spending means extra debt, driving up interest rates and choking growth.

3. Extra spending means printing money. Resulting inflation makes any growth an illusion.

This is a great comment by Shannon Love who posts at ChicagoBoys

[edited] Leftist economists don't understand that people read the paper.

The problem with their stimulus theory starts with their assumption that everyone will behave just as they would have without a stimulus, up to the point that the stimulus spending reaches a critical mass sometime next year.

However, people read the newspaper, see the tsunami of taxes, regulation, and inflation coming their way, and they alter their behavior immediately. Passing the stimulus bill today and planning to raise taxes tomorrow, alters people’s behavior right now. The expectation of paying for the stimulus later drives down economic activity now, long before the stimulus can hope to have any effect.

Obama’s team can’t see this because they have an ivory tower model of the economy. They think people do not make economic decisions until they actually receive money. They can’t seem to grasp that the economy results from the choices of real, live, human beings who can and do make plans based on their predictions of future conditions.

Obama expects people to stand around passively until Obama does something that makes them react. Instead, they’re anticipating him.

+ + + +
Stimulus Does Not Cure a Recession
Jobs change when people change what they want to buy or can afford. This takes time and adjustment. Businesses won't hire because of a short-term boost to their income that is being borrowed from later taxes.

Why Spending Stimulus Plans Fail
Government spending merely transfers jobs and income from one part of the economy to another.

Econ 201: The Myth of the Economic Multiplier
Government spending doesn't multiply anything. It takes resources from taxpayers and applies them to government projects. You get a bridge or some paperwork, that is it.

The Will to Have Efficient Cars

How Will You Spend Your $2,800?
05/20/09 - CafeHayek by Don Boudreaux

[edited] President Obama has no experience as an entrepreneur or in the automotive industry, but has supposedly designed fuel-efficiency standards that he assures us will save the average car buyer $2,800 over the life of the vehicle.

No one in Detroit, Britain, Japan, Germany, Korea, Sweden, Italy, or France, and no one with decades of experience producing and selling automobiles has yet devised vehicles that are so obviously attractive as the ones now promised to us by the Obama administration.

We can admire Obama for freely offering his idea to the public. If his idea is workable, he could have earned billions by licensing his idea to auto companies. We are certainly lucky that he is simply forcing us to use his idea without charging for it.

+ + + + +

Magic Power
There seems to be a leftist belief that technologists are holding back the cheap, efficient world that they could deliver, if they would just stop being grasping and lazy. Why don't they just do the math and make everything work faster and better? Could the nerds give us cheap power if they wanted to?

Efficiency Breakthrough: Small Cars With Small Engines
The Obama administration estimates paying $1,300 more per car to meet mileage goals. This is absurd. Consumers would need to pay more AND move down a few vehicle sizes. See the European equivalents, engineering considerations, and the financing.

Is There a Future for Business Schools?

Is there a future for Business Schools?
03/24/09 - Mises.org by Tim Swanson
This short post supplied the links below.

- - - -

The End of Business Schools?
09/01/02 - AOM Online by Jeffrey Pfeffer and Christina T. Fong

This study has a scholarly approach. They find that it took about one month to convert professionals from other fields into business consultants.

[edited] Available data suggests that business schools are not very effective. Career success does not correlate with having an MBA degree or grades earned in courses. There is little evidence that business school research influences management practice. These results question the relevance of management scholarship.

Consulting firms in the late 1990s found it difficult to compete with high-technology start-ups for talent. They had always hired some people without MBA degrees, but they increased the numbers, to include lawyers, doctors, and philosophers.

Consulting firms had to provide training so these individuals could give advice to companies using business knowledge and language. Many started or expanded 3-week programs to teach new hires the basics. Apparently, it took only 3-4 weeks for people to cover what business schools take 2 years to teach.

Internal studies found that the non-MBAs did no worse and sometimes better than their business school counterparts.

- - - -

MBA Schools Have Nothing to Offer in Our New World
03/25/09 - Bloomberg by Matthew Lynn

A general complaint against business schools. What could they have been teaching?

[edited] The MBA factories took a pseudo-scientific approach to finance. They promoted a mechanistic management style, and they taught a managerial elite more interested in rewards than producing lasting wealth for their societies.

They taught that running a company could be mastered by anyone through a set series of formulas from a textbook. The entire private-equity industry, mergers, and acquisitions are founded on that principle.

Academia largely invented the intellectual tools that led us into the financial meltdown. Complex models for pricing risk created the market for the options and derivatives contracts that have caused so much trouble in the past year.

The business schools took mysterious and unknowable "risk" and tried to make it as easy to count as peas in a pod. They encouraged a generation to go into investment banking armed with the belief that they had mastered risk.

In reality, management is a skill that is acquired through experience, judgment, and flair. Billions are about to be wasted relearning a simple fact that should never have been forgotten.

- - - -

Did Joseph Wharton Cause The US Financial Meltdown?
10/21/08 - Mises.org by Tim Hartnett

A disapproving review of what Americans will support, as long as an MBA in finance is proposing it. If you can't understand what they are saying, they must be smarter than you.

[edited] Americans are raised to believe there can be no such thing as a glut in graduate degrees. We don't think that any form of schooling can do harm.

What are the talents of the guys who rise to the top of established business empires? A good lot of them seem to specialize in finding ways to produce revenue, but not much of anything else.

Well into the 20th century, journeymanship in a business was a natural route to an executive position in big-time corporate America. People with the hands-on experience in mechanics, sales, manufacturing, and agriculture were residing at the top of many fields of trade. As late as the 1950s, entrepreneurs with widely divergent perspectives arising from a vast array of influences and experiences held sway in American industry. Today, those back roads are almost unknown.

The latest line is that government bailouts are good investments. This comes from politicians, ex-politicians, TV personalities, and people who run the cocktail circuit from the west side of the District to the east side of Manhattan.

"Remember Chrysler, we all made out big on that one." is the common refrain. Skeptics might have difficulty recalling it as quite so clear cut. Sure, number three of the one-time "Big Three" is still with us, but who-got-what out of that sweetheart deal remains hazy.

Money passing back and forth between the amorphous blob in DC and listed corporations is as difficult to follow as a shell game. Finding our end of the "profits" is like trying to unravel derivatives. So we take their word that all is soundly managed. Between cigar puffs, the MBAs reassure us that "in five or ten years everyone will be sitting pretty." The public is expected to sit blinking like a corporate mistress in a James Thurber cartoon.

Use Inflation to Fool People

We Were All Keynesians Then
01/09/06 - Cato.org by economist Ike Brannon
(via The Angry Economist)

Keynesian economists expect most people to be slow-witted and unable to make rational economic decisions. The government tries to fool people into working harder by inflating the currency to just the right amount. But, it doesn't work for long.

[edited] In 1961, John Muth published in the journal Econometrica, demonstrating that people thoughtfully use available information to predict future prices, and then make economic decisions based on "rational expectations".

Muth's insight was radical during that heyday of Keynesian economics. Today, it is an accepted part of the canon of economics.

"Rational expectations" says that entrepreneurs and workers do not assume that prices will be constant when they need to forecast future prices. They use all available information to estimate what prices will be, and their estimate is correct on average. They will make mistakes, but they will not be consistently wrong.

Muth demonstrated that rational expectations explained prices quite well for a market in hogs, thought to exhibit wide, predictable price swings.

Muth's paper was published at the time that Keynesian economics had become ascendant in the political world. Policymakers thought they could permanently increase employment by increasing inflation. Supposedly, higher inflation fools workers, who mistake a rising dollar wage for a real increase in their buying power. As a result, people would take jobs they would not otherwise take, and work more hours than they would otherwise work, increasing employment and output.

Muth's work explains why the 1970's economy experienced "stagflation", slow economic growth and inflation at the same time. Rational expectations predicted that people may not always make economically optimal decisions, but they can't be consistently fooled by government policies.

The Government Bailout IS the Problem

The Failout and Krugman
02/29/09 - Angry-Economist by Russ Nelson

The economy is bad because no one can predict the future with a big government elephant stomping around. The elephant can't solve the problem, and it scares away the elves who can solve the problem. The elves are small, but they are smart and there are a lot of them. The economist Paul Krugman has spun a theory for recovery. Will he bet on its success?

[edited] The problem here is simple: credit is scarce because nobody wants to lend and nobody wants to buy. The Federal Government is threatening to borrow and spend a TRILLION dollars.

If you are bank, would you loan money if you knew that an A-grade customer was going to be spending a TRILLION dollars soon? Of course not. Even if they choose not to get their loan from you, the price of lending is going to go up. It must go up when a TRILLION dollar buyer is showing up. So nobody is lending now.

And why would anyone buy anything now. You want to be positioned correctly for the TRILLION dollars which is going to enter the market soon. You don't want to invest your money in something, only to find that the market has shifted and your investment is toast.

The failout is not the solution to our problems. It is the CAUSE of our problems, merely by being threatened as a government action.

Why is this not obvious to everyone? I blame Krugman.

I wonder if Paul Krugman has borrowed huge amounts of money and spent it already? If he hasn't done it, then why should we do it? If he doesn't trust his own theory for his own household, then why should we trust his theory for our country?

Of course he hasn't done it, because his theory requires that many people behave differently together than each person would for himself. The group is made up of individuals, so how can that be?

Krugman's theory has no legs. That dog don't hunt.

-----
Why the Slow Recovery?
02/03/10 - Cato at Liberty by David Boaz

(edited excerpt)

President Obama wonders why banks aren’t lending, employers aren’t hiring, and investors are holding back. Answer: Taxes, regulation, and uncertainty. Some headlines:

• Wealthy Face Higher Taxes.
• Big Firms Would Face Deeper Tax Bite.
• A Red-Ink Decade/Obama Budget Sees Years of Deficits.
• Obama to target overseas tax breaks.
• Higher Taxes for All in Obama Budget, $1.6 Tril 2010 Deficit.
• Obama budget would spend billions more.

The Economic Policy Institute illustrates this with a graph, at the link.

Employers, investors, and entrepreneurs are discouraged by higher taxes, more regulation, a larger share of GDP shifted to government, and expected Fed monetization of the soaring debt.

Obama budgeteers are flipping through the tax code for ideas.

Robert Higgs observes that regime uncertainty prolonged the Great Depression. Investors were worried about what FDR might do next.

Will Wilkinson:  Treasury Secretary Tim Geithner has said that businesses need certainty today to make long-term plans for tomorrow. But, creating completely irresponsible, economically chilling regime uncertainty appears to be the intent of the Obama administration.

Keynes Likes Totalitarians

Keynes Politely Explains How to Destroy Civilization
02/27/09 - Blog.Mises.org by Jeffrey Tucker

The late economist Lord John Maynard Keynes regarded his own theories as a best fit for totalitarian societies. It is so much easier to achieve full employment when you can tell everyone what to do and decide what they will be paid. Every member of an ant colony is employed, and seemingly happy.

Keynes impresses me with the long, jumpy, tedious construction of his sentences, to express the simplest and fuzziest thoughts. I find that saying something directly is easy. Saying nothing, or everything, with detailed qualifications and exceptions, in one sentence, is quite difficult. Why bother with paragraphs when long sentences are so much more impressive?

[edited] I'm sorry, but reading Keynes gives me the chills. I can easily imagine his dispassionate narrative about events in a Gulag, justifying every horror with a pseudo-scientific rationale made up on the spot.

Oh wait: he did do that. From the 1936 foreword to the German edition of The General Theory:

Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a lance measure of laissez-faire.

----------
The General Theory of Employment, Interest and Money, Chap. 24
Dig into the thought of Lord Keynes at Marxists.org.

The Political Dictionary: "Keynesian Economics"
A satirical definition, unfortunately true.

Audacity to Do Nothing

The Audacity of Doing Nothing
02/11/09 - Blogs.Law.Harvard.edu by Philip Greenspun
(via Peter G. Klein)

Our prosperous society is built on predictible law and consequences. This is already a shining accomplishment in an uncertain world. It does no good to, in effect, suspend the law and take extraordinary actions because some people made bad bets, lost money, and have political influence. Changing the rules and using naked government power makes things much worse. It removes predictability and rewards the people who took outrageous risks.

See also Rewarding Bank Management for Failure

[edited] The "real money" investors didn't want to invest alongside the government. If the bank loses money, they fear the government will take 100% of the value left in the bank and leave private investors with nothing, including recent ones. This happened to recent investors in Fannie Mae.

The "real money" investors didn't want judges to modify contracts, as when bankruptcy judges reset mortgage payments at a lower level and reduce the principal owed. A central tenet of the U.S. Constitution is that people are free to make contracts.

A foreclosure is greatly preferable to these folks than a modification. In a foreclosure, the most senior investors get what they expected, their money back. The holders of the most junior tranches [last to be paid], which carried a higher return and were known to be high risk, would get nothing. This is also what they expected. If mortgages are modified by government action, it is unclear how the obligations among the various private parties should be adjusted.

One money manager scoffed at the idea that the markets had failed. "The markets are working fine, but they're giving people answers that they don't like, so people cry market failure." Stocks and bonds low? That's because investors are afraid of a prolonged depression and continued government interference.

A house in a jobless region of Michigan is worth almost nothing. A place with 50% of its former jobs only needs 50% of its houses.

The government is a lot bigger and more powerful now than in prior recessions. Rich companies and people can put some of their wealth into lobbying. They demand that the government prevent them from getting wiped out or at least slow the process.

Spending Did Not Help Japan

What can we learn from Japan?
02/06/09 - CafeHayek by Russell Roberts

[edited] Most Japanese economists take a bleaker view of their nation’s track record, saying that Japan spent more than enough money, but wasted too much of it on roads to nowhere and other unneeded projects.

Dr. Ihori surveyed public works in the 1990s. The spending created almost no additional economic growth. Instead of spreading beneficial ripple effects across the economy, the spending led to declines in business investment by driving out private investors.

Critics said decisions on how to spend the money were made behind closed doors by bureaucrats, politicians and the construction industry, and often reflected political rather than economic considerations.

The Japanese Didn't Try Hard Enough?
02/07/09 - Blog.Mises.Org by Tim Swanson

[edited] This NY Times story discusses the Japanese government spending packages during the 1990's.

The story notes that most Japanese consider all of the plans to be resolute failures. Yet, a number of Western economists believe that Japanese taxpayers simply did not spend enough!

How much was not enough? Japan spent $6.3 trillion on construction-related public investment between 1991 and September 2008. [That is $6,300 billion.]

Read the "Stimulus Package Unveiled" from the WSJ and "Japan" by Benjamin Powell.

Will You Bet On Your Opinion?

Will $100 Shut People Up?
02/06/09 - Crime & Federalism by Mike

[edited] When people state a stupid opinion or false fact, I no longer argue. I say, "OK - I'll bet you $100 that you are wrong."

People never take the bet. What's up with that? It's amazing how something as small as $100 can test a person's convictions. Amazingly, if you will not put $100 on the line, why should I believe you? People want me to change my mind based on their assertions; yet their assertions aren't even worth $100 to them!

How about people who demand that the government provide a stimulus to the economy. Perhaps Paul Krugman will say, "I'll wager $10,000 with any of my critics that if x-stimulus occurs, y-economic effect will follow."

Why aren't these economists making huge bets? They are rather confident in their opinions. They should go win that money! If they are embarrassed by greed, they can set up a charity as the beneficiary of the wager.

If someone wants to spend billions or trillions of taxpayer dollars, but won't offer up a few thousand of their own, then what should we think of him?

Macroeconomics is Astrology, Not Science

Macroeconomics 'Experts' Apply Astrology, Not Science
01/30/09 - RealClearMarkets by Frank J. Tipler, Professor of Mathematical Physics at Tulane University.

[edited] The inability of macroeconomic theories (about an entire economy) to make accurate predictions means that those economists do not know what they are talking about. Our leaders are being advised by macroeconomists, and they haven’t got a clue where they are leading us. Their actions may lead us out of the current recession, or they may lead us into a depression as bad as the Great Depression.

Franklin Roosevelt is often given credit for experimenting with the economy in a scientific manner. He did nothing of the sort.

Any experiment involving human beings has to be a controlled experiment, as in medicine. Half the patients are given the new medicines and the other half, the controls, either the old medicine, or a placebo. Then, and only then, can one tell if the medicine actually improves the condition over doing nothing (the placebo), or is making matters worse.

In contrast, today’s economic advisors to the President, like Roosevelt, propose to apply their economic medicine to the entire economy. This is astrology, not science. The professors of economics have no true, experimentally confirmed knowledge of macroeconomics.

The widely touted macroeconomic “experts” are no experts at all.

- -
Is Macroeconomics a Science?
02/26/10 - WSJ.com by Russ Roberts, professor of economics at George Mason University

Fred:  Why did the Great Depression last so long?
Economist:  I just don't know, but I'm willing to guess.

[edited]  Which theory is the "right" way to think about the boom and the bust? Or are they all wrong?

I once thought applying statistics to economic questions would settle these disputes, and the truth would out. Econometrics is used to measure the impact of one variable while holding other factors constant. I now believe that we don't have data on too many factors. There are too many connections between the variables which we don't understand and can't model or identify.

We should expect less of economists. Economics organizes thinking about the complexity of the world around us. That should be enough. We should admit publicly what we know, what we don't know, and what we may never know. That is the first step toward respectability.

- -
The Economic Test
01/04/11 - Cafe Hayek by Russ Roberts

[edited]:  Suppose the economy does well this year. Say growth is robust and unemployment falls. What would be the reason for the improvement? Can any model of the economy identify the cause? It could be:

• The natural rebound of an economy after a longer than expected downturn.
• The stimulus finally kicking in.
• The psychological or real impact of extending the Bush tax cuts.
• The psychological or real impact of the November election results.
• The steady hand of Obama at the tiller.
• All of the above.

Macroeconomics is not a science and is not even scientific, because the question I pose above is not answerable.

If the economy improves, there will be much talk about the reason. Data and evidence will be trotted out in support of the speaker’s viewpoint. But that is not science. We don’t have a way of distinguishing between those different theories or of measuring their independent contributions.

- -
Why Spending Stimulus Plans Fail

Articles about Stimulus

Let's Counterfeit Our Way to Wealth

There are many reports that the Obama economics team is using a multiplier of 1.5 to estimate the effects of government spending. The theory of the multiplier is that $100 of government spending is supposed to "stimulate" the production of $150 in increased wealth as an increase in GDP. GDP is Gross Domestic Product, the total value of all goods and services produced in the US economy.

These links report on this government thinking, and offer interesting analyses:  MasonWhat Will Be the Impact of Obama's Stimulus Plan?
01/26/09 - Seeking Alpha by John Mason
  [edited] The Keynesian model says spending $825 billion will generate something more, as new investment and spending is created from the initial stimulus. The word going around is that the Obama economists are using a multiplier of 1.5. Thus, $825 billion in new spending and tax cuts are supposed to result in another $412.5 billion in spending, raising the total effect to $1.2375 trillion.,  BeaudoinObama’s Bogus Economics
04/2009 - Reflections by Joseph Beaudoin
  [edited] The prediction of 3.5 million new jobs comes from a Keynesian economic model built by Christina Romer, chair of the White House Economic Advisory Board, and Jared Bernstein, economic advisor to the vice president elect.
  This model assumes a wealth multiplier averaging 1.5 for government spending. Mr. Obama would rather talk about these jobs than about how these jobs are supposed to come into existence.,  RugyThe Myth of the Multiplier
November 2009 - Reason by Veronique de Rugy
  [edited] Two studies stand out: by Robert J. Barro and by Valerie Ramey on how military spending influences GDP. Both studies found that government spending crowds out the private sector, at least a little. Both found multipliers close to one: Barro’s estimates 0.8, Ramey estimates 1.2.
  This means that every dollar of government spending produces either less than a dollar of economic growth or just a little over a dollar. That’s quite different from the administration’s favored multiplier of four.
  Ramey also found evidence that consumer and business spending actually decline after an increase in government purchases., and BarroGovernment Spending Is No Free Lunch
01/22/09 - WSJ by Robert J. Barro
  Back in the 1980s, many commentators ridiculed as voodoo economics the extreme supply-side view that across-the-board cuts in income-tax rates might raise overall tax revenues.
  Now we have the extreme demand-side view that the multiplier effect of government spending is greater than one. Team Obama is reportedly using a number around 1.5..

Obama also believes that the multiplier for tax cuts is only about 1, so much more wealth is created when the government spends money collected from taxpayers than when the taxpayers spend that money. The idea is that the taxpayers might save some of that money, so it won't flow around and create wealth.

Obama believes that the government can spend so that its dollars go to people who won't save any of it. They will help the rest of us by spending it all. They will be doing their patriotic duty while they watch big-screen TV's and eat at expensive restaurants.

Obama's team is making this stuff up as they go along. It can't possibly be true. But, being in a good mood, let's assume that it is true. Then the following is also true.

We should immediately license counterfeiters.

Read more ...

Anyone who can produce good looking paper money should be licensed to print up as much as possible, after agreeing to give it to people who are likely to respend it immediately. That would be anyone working for minimum wage, the obviously unemployed, or even friends who would take the oath to spend, spend, spend.

This meets all of the conditions that the government likes for its own programs. There is no trickle-down; the money goes straight into the hands of the people who can save us. This avoids giving any money to the fat-cat businessmen who have let us down so far.

This money should have the same 1.5 multiplier associated with government spending. The money won't be saved, it won't go to the taxpayers (who have their own money), and it will get into circulation immediately where it can stimulate the economy and even create more tax collections.

Even better, there is no need to raise taxes to get back the money in the future, because this would create it at very low cost. The investment and job creation plans of the taxpayers would not be interrupted.

There is one catch. The multiplier is "only" 1.5, so it seems unfair to give the counterfeiters too much wealth. So, here is the deal. The counterfeiter would keep $15 out of each $100, using $5 for supplies. He would agree to give $40 to approved charities, and $45 to the chronically unemployed and underemployed. There is no need to be picky, because there is plenty more where that came from.

Here is how the wealth totals up per $100 counterfeit:

New Spending
  Counterfeiter   $   10
  Supplies             5
  Charities           40
  Unemployed          45
Multiplier effect     50  (on $100)
It's Fake Money     -100
Counterfeiter       - 10
                  ------
      New Wealth  $   40 

Every $100 that the counterfeiter prints up creates $40 in new wealth in the economy for the rest of us, after subtracting the counterfeit money (it is fake) and the counterfeiter's share. There is no increase in taxes, and tremendous support for charity and the un/underemployed. This is a win-win situation for everyone. Let's get printing!

Does this seem too good to be true? Yes, it isn't true. But, given the 1.5 multiplier, where have I gone wrong? Or, much more importantly, where has Obama and his economic team gone wrong? Maybe they don't care, as long as they are the ones spending the money. Real money taken first out of investment and jobs.

------------
Why Spending Stimulus Plans Fail
The money isn't free. It is taken from the people who plan and invest in productive organizations. This destroys jobs and lowers everyone's income. The money is then given to government agencies who increase budgets. This is a form of government consumption. Investment is turned into consumption, and job expansion is killed.

Keynes, Digger of Holes
No one should trust a theory that predicts greater prosperity from digging holes. Yet, this is the theory by Keynes that Obama is following, and many past presidents have followed, to forcibly change our society. We will supposedly create even more wealth in the future by wasting our current wealth today.

Econ 201: The Myth of the Economic Multiplier
Government spending doesn't multiply anything. It takes resources from taxpayers and applies them to government projects. You get a bridge or some paperwork, that is it.
  The "multiplier" from government taxes is actually less than 1. The government wastes resources collecting more tax, and the citizen wastes resources trying to minimize his tax. Then, the government spends the tax revenue wastefully, achieving less economic activity than the citizen would have created with his resources.

Posts on Stimulus

Have Wages Been Flat?

Obama in a nutshell
01/16/09 - PowerLineBlog by Paul Mirengoff and John Hinderaker

Wages have gone up, but the cash that workers see has increased only slowly for 10+ years.

Your employer does not give you benefits as a gift. These payments are part of your compensation, and they come out of the higher wages that you would have gotten if your employer did not pay for benefits on your behalf.

Read more ...

Medical insurance is part of the problem. It should be cheaper when the employer pays for it rather than giving the same dollars to the employee, because the tax law prevents the employee from deducting the cost, but allows the employer that deduction. Simply put, medical benefits are paid tax free to the employee.

But, legislation adds "Cadillac-style" benefits to what the employer must provide, under the myth that you are getting something extra. These add-ons cost more than the tax benefit of the simpler insurance, so the entire package costs more tax-free than the simpler insurance would cost privately. Simply put, would you rather have the cash, or the lowest co-pays, acupuncture, and health club membership?

Obama is quoted:

[edited] Here's my basic principle: that wages and incomes have flat lined over the last decade. Part of that has to do with forces that are beyond everybody's control: globalization, technology and so forth. Part of it has to do with workers having very little leverage and that larger and larger shares of our productivity go to the top and not to the middle or the bottom.

Paul Mirengoff comments:

[edited] It should be noted that Obama's statement "wages and incomes have flat lined over the last decade" is not true. But taking it at face value, Obama derives this from statistics which do not include benefits.

The cost of labor has been rising steadily, but this is missed by indices that ignore benefits. In recent years (not confined to the last decade), workers have increasingly chosen, or have been required to "choose" by ill-advised laws, to take their compensation more and more in the form of benefits, specifically health insurance.

This is logical to the extent that health insurance is a "bargain" paid for with pre-tax dollars. But, if anyone wants cash wages to increase, as Obama purports to, there is an easy fix: repeal all state and federal mandates that require employers to provide, and therefore requires employees to pay for, Cadillac-style health benefits, whether employees want them or not. If Democrats aren't willing to do this, their protestations about "flat lined" cash compensation are disingenuous.

+ + +
See also: Company Paid Health Insurance is Part of Your Salary

Don't Believe Pundits

Separating Twins is Economically Illiterate
12/22/08 - EconLog by Bryan Caplan

People propose policies and explanations without thought of the consequences or any examination of likely causes. Caplan talks about separating twins in school, and reasons given for economic success or failure.

[edited] Schools ususally put twins in different classes. The main rationale is that they will make new friends. They will, but that doesn't mean you are doing them a favor. Twins put less effort into making new friends because they already have a better friend than most of us will have. The marginal benefit of making new friends is unusually small.

There is no reason to target twins. Do kids benefit from making more new friends than they naturally want to? If you believe that, you would separate as many children as possible from their current friends. Will they thank you later? If you are certain that separation is the right answer, why not try a little self-experimentation? Cut the time you spend with your best friend in half, and tell us how you like it.

-----
A decade ago, pundits said (wrongly) that the Japanese economy was doing well because their factories were destroyed during World War II. So, they built new factories and competed better than the victors with their musty old factories. Economists replied: If that is true, all we need to do is bomb our own factories!

Don't be fooled by pundits or by make-work bias. When the government applies some policy that interferes with people's lives and businesses, officials point proudly at all of the increased activity that results. They ignore the damage that this activity is aimed at correcting.

When you step on an ant hill, and see the ants rush out and mill around, the ants aren't better off because they have been put to work.

Investment Bubbles

Pop Psychology - Investment Bubbles
12/17/08 - The Atlantic by Virginia Postrel (via Brad DeLong)

A rise in price above a reasonable value (a price bubble), followed by a fall back to that value (a crash), seems to be a part of psychology rather than bad mathematics. Maybe you can avoid losing in the next bubble.

Read more ...

[edited] Economists have repeated an experiment for 20 years. Experimental groups of about 12 people start with money and shares to trade. The shares pay dividends of 24 cents at the end of each round, for 15 rounds, each round lasting a few minutes. The dividend may be fixed, or have an equal chance of being 0, 8, 28, or 60 cents, averaging to 24 cents. Participants have the same information, can’t talk to one another, and interact only through their trading screens.

The expected (average) value of the remaining dividend payments is 15 x $.24 = $3.60 at the beginning, and of course drops by 24 cents for each round as any dividends are paid. The participants can see the average value of remaining dividends on their computer screens.

There is no doubt about the true value of these dividend payments, no hidden risks or surprise earnings announcements. So, you would think that the trading price should be close to the expected value.

That is not what happens. In 90% of trials, the trading price goes way above expected value, then crashes as the 15th round nears. The participants do not seem to be bored or fooling around. The difference between a good trading performance and a bad one is about $80 in three hours, enough to motivate students to do their best. It seems that asset markets develop bubbles even under the most controlled conditions.

Say that the shares are worth $3.12 at some point according to the dividend payoff. Participants wonder "Can I flip these shares to a buyer who will pay more than I think it’s worth?" As long as a greater fool might pay $3.50, smart people may decide to pay $3.25 in the hope of making a profit.

For a stable price, everyone has to know that everyone is rational, but that is rarely the case. People bidding in an asset market do not immediately try to figure out the fundamental value. Instead, they try to buy low and sell high. That speculation creates a bubble.

The people who stick to fundamentals do not make the most in these experiments. The winners buy a lot at the beginning and sell midway through. They take advantage of “momentum traders” who buy when the market is going up, hold when it is going down, and end with the least money. Bubbles pop when the momentum traders run out of money and can no longer push prices up.

My opinion is that most people like betting and excitement, and they see fluctuating market prices as an opportunity to ride a wave for profits. Twelve students sit at computer screens with a very unexciting situation and a small guaranteed payoff. They can buy and hold shares that will yield $3.60 per share after 3 hours of waiting, or they can buy shares at a slightly higher price on speculation and see what happens.

Say one player buys some shares at 5 cents more than the rational price, and the dividend happens to be larger than usual on that round. Other players see the share price trade up and the payoff that they missed. It is easy to think that there is money to be made by playing the market, playing the desire of others to get into the more active game.

So, a few players buy at a higher price, and sell into an even higher price as others join in. It can seem that higher prices are justified by market activity alone, regardless of the expected value of the dividend. This type of herd-following works for a while until reality sets in. Some players with the right social strategy consistently make money, which gives the feeling that the right price might be higher than just the computed value.

In life, bubbles start when some available commodity, like houses or technology companies, show a steady price gain over a few years. Hope tells people that there just might be a large payoff at the end, even if hard facts make that unlikely. They start to play the wave rather than evaluate the numbers. The price wave is exciting, and the current winners are real. The payoff calculation is on a spreadsheet or envelope, and is only as real as a thought.

So, people think that the price of a house, or Starbucks Coffee, or Krispy Kreme Donuts can only go up, or at worst will sink slowly, allowing them to get out with a profit. But, the price drops suddenly back to reality and there is no getting out.

If you personally do not know what the reasonable, central value is for something, you can't rely on what others are paying, because they probably don't know either.

Support the Big Three and Lose Something Else

Subsidizing the Auto Industry Means Sacrificing Others
12/9/2008 - Business and Media Institute by Donald J. Boudreaux

[edited] It is impossible to know if the future benefits of electric cars are worth what could be lost by subsidizing them.

Perhaps resources artificially forced into advanced-battery development would otherwise have helped cure cancer, or encouraged development of more fuel-efficient jet engines, or deployed to keep millions of retired Americans more financially secure. Neither Neil nor Uncle Sam can know the value of what would never be created as a result of subsidizing unprofitable production in Detroit.

Politicians Are Not Business Experts

Letter to the Editor of the Baltimore Sun
12/06/08 - by Don Boudreaux, Chairman of the Department of Economics at George Mason University.

[edited] If you wouldn't entrust your 401(k) to a senator, why support political investments in the auto industry?

You opine that Detroit automakers "need to explain in detail to Congress how they intend to succeed.

No. These companies deserve investment funds only if they are able to make cars that will sell AND can demonstrate this to private investors. Congress is manned by people who specialize in winning popularity contests called "elections." They are not expert in judging business models, or at pondering the pros and cons of different retail-distribution methods, or equipped to accurately analyze consumer demand for automobiles, or even aware (from their track record) of the most elementary principles of finance and economics.